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Keynesian vs Austrian Economics

This Debate is one between the two most prominent economic theories: Modern Keynesian Economics and Austrian Bisuness Cycle Theory.

**NOTE** Arguments should presented in the affirmative of either side should be chararcteristics that are universally accepeted as characteristics of that argument. The same applies to rebuttals (no straw man arguments).

I realize that there is a sligt overalp between the two theories; however, they are two very distinct philosophies.

Keynesian

Side Score: 34

Austrian

I believe Austrian economics is obsessed with self-regulation. The whole concept of lowering business taxes and regulation is to is to give businesses ore free capital to reinvest in the company. The only problem: corporations have more free capital than ever before. WE DON'T HAVE A SUPPLY PROBLEM.

WE HAVE A DEMAND PROBLEM. Consumer spending is, in my uniformed opinion, the most important economic statistic. C+I+G (X--M). It's all about the demand. Keynesian economics realizes that.

Asserting that "corporations have more free capital than ever before", therefore "we don't have a supply problem" is vast oversimplification which neglects the obvious goal: increasing living standards.

Human society has always had "supply problems", or simply a need for greater production. To deny this is to state that we have enough consumer end-products (towards the goal of increasing living standards), and we no longer need to produce more or better houses, electronics, furniture, vehicles, and so on. Of course we want more supply and production, as much as we can reasonably get. Who wouldn't mind having a spare car or two? The demand is always there, once more important needs have been met.

Keynesians fixate on demand as if the only way to get consumers to buy is to give them more currency to spend (or alternatively, go into debt). Lost on them is the concept that (absent central bank inflation) the reverse may also happen - a drop in prices, which unleashes held back demand. Price drops (via more capital, more supply, more production, more productivity) solve the supposed "insufficient demand" problem.

Moreover, the currency manipulation (endless credit expansion) Keynesians advocate for causes additional unintended problems, such as acting as an "inflation tax" on savers and the working class, as the additional credit devalues existing currency (and slow rising worker pay rates). Naturally whoever is first to receive the benefits of the credit expansion (in the form of artificially lower mortgage interest rates, for example) is benefiting disproportionately from others who responsibly save & invest for the future. Those who sacrifice consumption today--for the promise of greater consumption tomorrow--are penalized for their more responsible behavior instead of being rewarded for not wastefully consuming today's resources.

Also, Fed interest rate price controls disproportionately harm the capital-intensive early stages of the structure of production (such as mining & raw materials refinement), making it difficult for entepreneurs to forecast future economic conditions, as it creates the familiar "boom/bust" cycle of recessions and depressions.

The largest "depressions" all took place after the creation of the largest central bank of all time (Federal Reserve) - not before - and this is no coincidence. Those who point out similar crashes before the Fed as negating evidence fail to realize that US currency was not under free market controls during the pre-Fed period either, and was often being artificially manipulated. It's also important to realize the role that fractional reserve banking (considered fraud by Austrians) plays in further destabilizing the economy, creating panics, and allowing for even more credit expansion.

I can argue against most of Austrian Economics better than for most of Keynesian, but let me try arguing for Keynesian( I would normally advocate a different heterodox economic than Austrian).

Demand is what drives society, while you can not isolate demand from supply and make effective economic decisions it seems clear that demand is the more weighted of the two. A supply of houses will sit useless and effectively valueless without demand, they will not be made as much if at all, etc.

Investment in houses would thus not be profitable, and not be done, everything appears to come back to demand. When the economy declines and demand goes down within, the government may be able to compensate enough for the lost that its efforts will be multiplied by private forces; possibly enough to stop the decline and likely lessening it to some degree. It is the only entity capable of this compensation. You can think of it as Loaning demand, the higher taxs in later times (or in previous times to hedge) and other forms of financing is a type of demand financing where a little less demand over the long run is better than a lot less in the short run.

Demand is what drives society, while you can not isolate demand from supply and make effective economic decisions it seems clear that demand is the more weighted of the two

Did Microsoft or Apple exist prior to 1975? If demand is what drives society, wouldn't this mean that Microsoft and Apple are in a constant state of existence? How did Microsoft and Apple come into existence? Did the demand create Microsoft or Apple? No, because it did, it would have already existed.

Supply is just as important if not more important because it leads to entrepreneurship, and it creates supply, and demand will meet the supply with an equilibrium.

The notion of demand being more important only leads to creating artificial demand as does Keynesian economics constantly does.

A supply of houses will sit useless and effectively valueless without demand, they will not be made as much if at all, etc.

If there is no demand, why would there be supply? That is what a market is. Entrepreneurs take the risk in building homes because they think that there is a demand for people to live in structured buildings instead of the hot or cold weather. The building of homes is known as division of labor.

The demand for safe long distance space travel exists and is extremely high as well, but a demand isn't relevant without a supply or an actual product. In that sense the creation of a supply & innovation is important, but focusing on just supply (or demand) would be silly and strikes me as a chicken-or-egg argument. I'd argue that Keynesians focus almost exclusively on demand, and that produces a pretty skewed perspective. I don't think either is significantly more important to a stable prosperous economy (for growth however, ability to expand supply & production is key).

You state above that there would be houses (supply) without demand due to "over-investment, general glut, a crisis of overproduction, etc.", which is a little vague. What leads Keynesians to believe that businesses owners, who's specialized job performance is based on their ability to anticipate changes in demand & respond efficiently, would suddenly lose the ability to do this all at the same time and for no apparent reason? In a truly free market, this is what would have to happen, but it's an obvious absurdity that the very people who obtained their industry roles because of a proven ability to effectively predict & respond to market demand would suddenly and in unison "forget" how to do this.

So we have to look for other causes for unsustainable overproduction in a particular industry. In housing, it was multi-faceted, but you can read about the Federal Reserve & Federal Gov policy causes in Meltdown by Tom Woods (link in another post on the Austrian side of this page).

Demand did not drive their creation, but it most certainly fueled their growth. If there as no demand for their products, they would have failed. The two (supply and demand) go hand in hand; however, of the two, I believe demand is far more important. Creation of a supply is only to create demand for that product. Producing more of that product (increasing supply) is done only to satisfy the high demand. Supply-side economics is a failure (see Bush Tax Cuts). Boosting supply WILL DO NOTHING if there is no demand for it to meet.

I favor demand-side, not supply-side, economics. Keynesian is a flawed version of that. You don't need to spend yourself into oblivion to boost demand. You have to cut taxes for the people who actually spend the majority of their discretionary income (hint: that's not the rich). It doesn't matter if you make all the money in the world if it is sitting in a mutual fund or worse, in a bank account so that that inflation can deteriorate the wealth.

Overproduction is better than over consumption

Not for the companies making those products... If economics was entirely consumer-centric, all businesses would be non-profits.

You say cutting taxes for people who spend most of their income will boost demand. Have you tried going into a poor neighborhood to ask how much in taxes they've paid? Or to ask why they don't want to buy anything? The demand is there, obviously. Poor will line up for miles to get to a good deal. But due to the reality of a limited supply of goods (existing + produced), all of this demand cannot be met for everyone. That's where the price system is important (which gets at why people in your poor neighborhood don't just go buy everything they want).

Since demand for products is more fixed (nearly infinite - at the right price), you tap into this (lower prices) by increasing supply, production & productivity. This can be done (in a stable economy) through savings & investment, i.e. postponing consumption now for the promise of greater consumption later. Lower taxes help of course too, but taxation isn't a free market/capitalist activity so it doesn't play a role when you're trying to simply understand the fundamentals of how an economy grows.

By saying "Demand is what drives society", it seems you are attempting to isolate demand from supply. Saying that "it seems clear that demand is the more weighted of the two" without valid reasoning to explain why is not very convincing. Keynesians attempt to isolate demand from supply to the best extent they can, but doing so is about as futile as trying to determine whether the chicken or the egg came first.

The example of "a supply of houses" being "useless and valueless" is similarly absurd. Of course there is some use and value - it may not be equal to that of your first house, but there is always demand for more--at the right price (in this example they'd likely be summer or vacation homes), and of course the price is set by the ratio of supply vs demand.

The only way an "excessive supply" would be a genuine problem is if you literally had produced too much of everything to the point that nobody would want a product, even if it were free - realistically, an impossibility. The reason we sometimes see a "surplus" of cars or houses is simply the result of economic miscalculation & resource/capital misallocation or "bubbles", and all this is caused by the boom/bust cycle which the Federal Reserve propagates.

Demand is nearly infinite, given sufficient supply to lower prices (creating such an abundance of goods that demand is overwhelmed is quite unlikely to happen, ever). Therefore I would argue that supply, the much more limited of the two factors (constrained by the reality of resource & capital scarcity) is a more relevant factor to ensure rising quality of life and economic growth. (Of course to have a stable non-bubble economy, you can't fixate on either supply or demand - they are inseparably linked.)

What brought us out of the Great Depression? Oh that's right, the War. What was the war an example of? Oh that's right, Spending Money. What does Keynes argue is the key to economic success? Oh that's right, Spending Money. Huh. That's weird, but it's not really is it? Keynesian is the way forward.

Obama is failing only because he didn't put ENOUGH in to make a difference, here in Britain we are doing so much worse than the Americans because our Government has been cutting, cutting, cutting. Now we're entering double dip. It certainly wasn't cutting that got us out of the Great Depression, that's for sure. Also, Keynesian theories are a way to get circulation up, if you spend then people have more money who then spend it, the cycle continues. If you cut, money is being taken out of the Economy at the time when it really needs it, this credit crunch was caused by a complete lack of faith in the markets, if governments spend then they also make the public think that it's fine to spend too! :)

Obama is failing because Keynesian fails. Britain is failing because Keynesian along with socialism fails. Like Thatcher said,"the problem with socialism is eventually you run out of other people's money". That is what is happening in Britain. Along those same lines, government doesn't produce anything it can trade for money. It has to take money out of the economy to put it into the economy. It always does this with a great amount of fraud, waste and abuse not to mention how extremely inefficient it is. Or it has to print money, which drives inflation and brings down the value of the dollar and wipes out capital which is integral in expanding economies. Government crowds out the private sector and the private sector is much more efficient in how it uses it's resources. Of course, having less to spend because of government confiscation doesn't help either.

You obviously aren't aware of the GREATEST enemy to any world paper currency, Inflation... Everything you just stated is correct and would work in the short term. However, A Keynesian system is basically interdependently built on the premise of unlimited resources. Spend, Spend, Spend... A monetary policy built on spending leads to illegitimate investment and a waste of resources. Simply spending money doesn't do much of anything other than waste citizens tax dollars. It must be a WORTHWHILE investment. You tried using the premise that just because we used a stimulus in WWII and we recovered that stimulus plans are of legitimate validity. Sorry, but that's not how calculated reason works... If you look at stimulus activities throughout the course of the decade and history for that matter you'll see it's continuously failed and has only caused inflation and deeper setbacks. I'd finish by ranting on how much I despise socialism and the rest of the Keynesian regulatory policies but unfortunately I have a life... Peace and freedom to all!!!

At what point, I wonder, would Keynesians finally admit that "stimulus" has failed? (Probably never...) Doesn't it matter that the level of credit expansion and stimulus attempted so far has been likely unparalleled in human history? Bernanke has "created more dollars" (in layman's terms) than ALL of his Fed predecessors--in fact, twice as much. At what point will Keynesians acknowledge that the entire concept is a failure? Currency expansion and "stimulus" at this level cannot go on forever, that's for certain.

Using this same "not enough stimulus" reasoning you could argue that had stimulus NOT been tried, we'd be on the road to real recovery by now. So, you can't determine which is true without a sound theoretical understanding. The Keynesian theoretical fallacy is that consumption creates prosperity (even centrally planned spending, with all the malinvestments and inefficiencies that are introduced). Deferring consumptive spending in favor of investment in production, capital, efficiency--producing a greater abundance of goods in the future--is quite intuitively the source of greater prosperity.

And remember, Keynesians were the ones warning of a disastrous collapse after WWII, should government abruptly cut spending and "flood" the job market with returning military. This was done regardless, yet what followed was one of the most prosperous and successful periods of American history. Here we have a situation where massive demand (military spending) dropped abruptly, yet the economy flourished. This one example should be proof enough to dispel this Keynesian myth.

This is a good/correct point, but we can expand even more. I'm not sure which monetary stimulus you reference which you're saying worked. But you omitted Roosevelt from that list of failures, and in many ways he was the worst failure of all.

Roosevelt's New Deal programs & expansion of Hoover's failed ideas are such great examples of failed stimulus, you have to wonder how modern economists and historians get away with marketing it as the complete opposite! (Many cynics credit government-run public schools which utilize text books that take this extremely biased and ignorant point of view.)

These policies had nearly a decade to start working, prior to the artificial (& unsustainable) employment boost caused by WWII. These programs were unprecedented in nature (similar to some of the failed "bailouts" tried recently), and they still clearly failed even to boost employment (which you correctly implied does not in itself equal prosperity).

They were actually burning crops (!!!) and trying to control prices rather than allow the economy to properly re-size what was possibly an over-allocated economic sector. (Done for political reasons & to buy votes, of course - here we see the result of political selfishness & special interest pandering.)

Contrast the "Great Depression" example (where the government not only took action, but one party had basically full control) with a little known depression that was arguably worse (but much shorter) - the 1920-21 depression. During this depression--which is interestingly completely omitted from many (most?) public school text books--the government did nothing to "fix" the problem, yet it didn't drag on. (Notably, the government likely didn't try to "fix" the problem because the president at the time was having medical issues, so we can't even fully credit the FedGov in this case.)

Austrian Economics is the far superior in economic thought because the fundamental principle is the Neutrality of Money Theory, and foundation is the Austrian Business Cycle Theory, both describe how the capital structure of an economy is built.

Many economists maintain that money neutrality is a good approximation for how the economy behaves over long periods of time but that in the short run monetary-disequilibrium theory applies, such that the nominal money supply would affect output.

Self-Refulation? Laissez-faire is over-simplistic. If we haw learned anything from this crisis, it is that massive financial instititions left alone by government will fail. I want sustainable growth, not a series of ever-worsening bubbles.

If we haw learned anything from this crisis, it is that massive financial instititions left alone by government will fail.

If you truly knew what the Austrian Business Cycle Theory was, then you would know that 2008 crisis was caused by the Federal Reserve's cheap credit in the housing market. The creation of the housing bubble.

I want sustainable growth, not a series of ever-worsening bubbles.

Well, then Austrian Economics is what you want, Keynesian economics is only about creating a series of bubbles.

Reaganomics is a failure.

Ok, how is this relevant, Austrian Economics is not Reaganomics.

Deregulation is clearly not working.

Have you flown on a airplane? Those relatively cheap rates and competition are due to deregulation.

YOU: 2008 crisis was caused by the Federal Reserve's cheap credit in the housing market

Community Reinvestment Act? lol. Even assuming you are right (Which I don't believe to be true), the housing bubble aftermath would have been contained to lending banks. Unregulated Derivatives markets and CDO's spread the crisis to investment banks, investors, and subsequently, the rest of the economy.

YOU:Well, then Austrian Economics is what you want, Keynesian economics is only about creating a series of bubbles.

With the volatility and market gyrations of our economy, less regulation, less oversight, and fewer restrictions will only further the uncertainty and volatility.

Reagan--Bush had very similar economic approaches. Deregulation, cut taxes, very Austrian-esque

YOU: Have you flown on a airplane? Those relatively cheap rates and competition are due to deregulation.

Airlines? That's your defense? All I have to say is...American Airlines. Bankrupt. Delta. Went Bankrupt. United. Went Bankrupt. US Airways. Went bankrupt.

Unregulated Derivatives markets and CDO's spread the crisis to investment banks, investors, and subsequently, the rest of the economy.

The housing bubble is tied to derivatives. The global financial crisis that began in 2008 has been attributed to sub-prime mortgage lending and mortgage backed securities (MBSs). Cheap credit backed by more cheap securities.

With the volatility and market gyrations of our economy, less regulation, less oversight, and fewer restrictions will only further the uncertainty and volatility.

Actually, the opposite is true. More government intervention into the economy has only created more uncertainty and volatility. This is the current situation right now.

Reagan--Bush had very similar economic approaches. Deregulation, cut taxes, very Austrian-esque

Reaganomics is not Austrian. Rothbard debunks that quickly in this article.

Airlines? That's your defense? All I have to say is...American Airlines. Bankrupt. Delta. Went Bankrupt. United. Went Bankrupt. US Airways. Went bankrupt.

As Rothbard explains, there was little deregulation under Regan, and an net increase in regulation. Besides truck and airline was initiated by Carter and finalized by Regan.

Were these companies supposed to get a bailout? All of those companies were bailout by government in 2001. Bailout Bankruptcy is vital to capitalism WSJ

FYI use bold to distinguish conversation.

Are you sure you are in torn between the two sides? It doesn't seem like it. You haven't noted one positive thing in the Austrian side.

Someone already pointed out that Reaganomics isn't the same (although most Americans seem to think his policies worked, the 80's are thought of as a prosperous time), but this idea that went around in 2008 that "deregulation" caused a housing collapse is a far worse over-simplification. There's a great book about exactly this called Meltdown by Thomas E. Woods. Basically it places the blame where it belongs, primarily Federal Reserve policy, although there's too much more to add in this space here.

To address "deregulation", yes the elimination of some rules did definitely worsen the problem. But saying deregulation was the cause strongly implies that the industry was not regulated at all, which couldn't be further from the truth. Even after the supposed deregulation, there was no free market, and there were still major non-free market government interventions. The Federal Reserve's artificially low interest rates are a major one. Fannie & Freddie contributed, by creating moral hazard - why would a bank care whether a lender can pay a mortgage when they're able to toss the hot potato to a 3rd party & be guaranteed to profit no matter what happens? I'll let others reference Meltdown for more.

So I'd argue that saying "Deregulation is clearly not working." is like turning off a RC hobby aircraft's remote control while the craft is stalling in midair and saying "That didn't work!!!" once it crashes. If we're going to let it (plane/industry) go on it's own power, you've gotta hit the reset button (land the plane / fully deregulate the industry) and give it a chance.

In my experience, most of the time someone is blaming the "free market" or Laissez-faire for something, it's an accidental straw-man: it wasn't actually a free market.

Yes. Most modern "economists" and analysts conflate "price inflation" with currency inflation. It's important to realize that when Austrians say "inflation" they are referring to increasing the volume of currency in circulation (in the Fed's case credit expansion, which has the same effect). Eventually of course, this will cause what most "TV analysts" really are looking for (rising prices), but only considering "price inflation" prevents you from fundamentally understanding what is happening.

Most of these supposed analysts on TV don't even seem aware that there are two schools of thought, so it's no surprise to see them literally laughing at an Austrian analyst like Peter Schiff, pre-2008, when he's in the process of warning about an upcoming housing industry collapse...

(Search Youtube for some clips vindicating Austrian analysis, which Peter utilizes, and humiliating the so-called analysts with Keynesian training. Apparently pre-2008 simply disagreement and mockery was enough to rebut an opposing viewpoint. Not so much anymore...)

Of course they invest. They intend to retire like everyone else, don't they? They grow businesses like everyone else, yes? Keynes' "preferences" have nothing to do with anything, and if you think it did play a role in the formulation of his theories, you're going to need to provide some serious evidence to back that up. Most people aren't investing for their children (maybe at advanced age), and generally nobody invests just to make their estate/inheritance bigger... that's just not the driving motivation.

Keynesian economics wasn't "designed" for anything (again, proof needed). It happens to greatly benefit people today at the expense of those who come later, but history has shown that this boom/bust cycle occurs much faster than a human lifetime.

These just aren't really arguments used to properly explain Austrian theory or to dispute Keynesian theory.